18 October 2019
An electronic board displays stock market figures in Shanghai's central business district. Beijing pledges more measures to stabilize the market. Photo: Xinhua
An electronic board displays stock market figures in Shanghai's central business district. Beijing pledges more measures to stabilize the market. Photo: Xinhua

Cost of market rescue: Damas deprived of chance become smarter

On Beijing’s instructions, Chinese brokers have pumped in over 3 trillion yuan (US$483.16 billion) to rekindle stock market trading. And after the high-profile crackdown by the Ministry of Public Security, no one now dares to short-sell shares.

Yet I wonder, how does Beijing define “malicious short-selling”?

Short selling indeed puts downward pressure on share prices. But the purpose of shorting selling is to buy back shares at a lower price. How could this be labeled as malicious?

One thing for sure, the Chinese market is now run by Beijing and it will be a futile to try to explain what is going on with free market theories.

Just imagine how Beijing will react if the renminbi exchange rate plunges due to forex spectators’ short selling amid a bearish outlook of the nation’s economy.

Will these spectators be able to get away with it or will they be labeled profiteers amid Beijing’s threats of criminal prosecution? Or, when Beijing wants to suppress the value of its currency to spur exports, will it find fault with spectators who pounce on yuan assets and push up the exchange rate?

The Chinese currency can never go global if Beijing fails to diffuse these concerns.

The Financial Times revealed earlier this month that Chinese President Xi Jinping is the person calling the shots as he is also the head of the top party taskforce on financial and economic affairs.

Understandably, communist cadres must do as they are told, even though instructions from the top commander may do more harm than good.

Some direct consequences are obvious: the Chinese bourse today can be called anything but a capital market that functions at its best, and renminbi’s journey to a global safe-haven currency status has also been prolonged.

Now, as a result of its rescue maneuvers, Beijing has acquired a substantial portfolio of shares. It has to come up with an exit plan for the massive liquidity it mobilized as well as an arrangement or disposal program.

There’s pessimism in the international investment community, but others think it’s the time to bet against the common perception and make a foray into the Chinese market.

Some argue that the odds are still in favor of further surges despite recent fluctuations. I think they have a point.

As gauged by Warren Buffett’s market cap-to-GDP ratio, the value of the Chinese market currently stands at 60 percent of the nation’s GDP, of about half of the 150 percent ratio at the height of the 2007 bull run. It’s also lower than the US figure of 132 percent. So, as it appears, there is room for further rallies.

Another fact to consider is that the estimated amount of margin financing — money borrowed from brokerages using stocks as collateral — stood at 2.5 trillion yuan before the mania culminated, but it soon dropped to 1 trillion yuan after Beijing stepped in. So the bubble has deflated somewhat.

Lured by the euphoria, many individual investors, including damas, rushed to the market, surpassing the number of Communist Party members, which stood at 87.79 million at the end of last month.

However, according to private equity management firm Mahon, Chinese families still allocate most of their wealth to bank savings, and, on average, stocks only account for 13 percent of family wealth.

So people’s livelihood may not be affected too much if the market becomes more chaotic.

The broad picture of the Chinese economy doesn’t look too bad: consumption is on a steady rise, unemployment rate is generally low, inflation is well under control and a GDP growth rate of 6.8 percent can almost be guaranteed.

So why the all-out rescue despite the stable economic fundamentals?

In fact, Beijing’s visible hand may have deprived individual investors of an important lesson, something necessary for them to get smarter.

The conventional wisdom is that in the pursuit of money, if you lose, you have to pay the price.

Individual investors will never learn the lesson unless they know how it feels when bubble bursts.

This article is excerpted from two columns that appeared in the Hong Kong Economic Journal on July 21 and 22.

Translation by Frank Chen

[Chinese version 中文版 12]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal